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@techreport{NBERw24485,
title = "Banking, Trade, and the making of a Dominant Currency",
author = "Gopinath, Gita and Stein, Jeremy C",
institution = "National Bureau of Economic Research",
type = "Working Paper",
series = "Working Paper Series",
number = "24485",
year = "2018",
month = "April",
doi = {10.3386/w24485},
URL = "http://www.nber.org/papers/w24485",
abstract = {We explore the interplay between trade invoicing patterns and the pricing of safe assets in different currencies. Our theory highlights the following points: 1) a currency’s role as a unit of account for invoicing decisions is complementary to its role as a safe store of value; 2) this complementarity can lead to the emergence of a single dominant currency in trade invoicing and global banking, even when multiple large candidate countries share similar economic fundamentals; 3) firms in emerging-market countries endogenously take on currency mismatches by borrowing in the dominant currency; 4) the expected return on dominant-currency safe assets is lower than that on similarly safe assets denominated in other currencies, thereby bestowing an “exorbitant privilege” on the dominant currency. The theory thus provides a unified explanation for why a dominant currency is so heavily used in both trade invoicing and in global finance.},
}